In this episode, Tim explores the nuances of planning with life insurance.
Podcast Transcript:
WRVO Producer Mark Lavonier:
This podcast is part of the series Estate Planning Pro Tips, hosted by attorney Tim Crisafulli of Crisafulli Estate Planning and Elder Law PC an estate planning probate and elder law firm serving clients throughout central New York. A former school teacher, Tim explains complex legal subjects in an easy-to-understand way. The commentary focuses on the central aspects of estate planning, such as wills, trusts, asset protection, long-term care, and probate. And now here's Tim.
Tim Crisafulli:
Planning with life insurance requires paying attention to three aspects of the policy: the insured life, ownership, and beneficiary designations. The insured life is the easiest. Quite simply, this is the person whose death triggers the payout of the death benefit. Life insurance policies are typically tied to a specific person's life from inception, which is why it is often necessary for the person whose life is being insured to submit to a medical questionnaire or even a medical exam. Next, ownership of a life insurance policy relates to the person who controls it. The person whose life is insured is often the owner, but that is not always the case. The owner of a policy insuring a person's life could be a business, a business partner, a spouse, a parent, or virtually anyone who has an interest in the person whose life is being insured. Ownership matters for estate planning. If a person needing nursing home care owns a life insurance policy with a cash surrender value, that owner may be required to cash it out and to pay over the cash surrender value to a nursing home, ultimately sacrificing the death benefit. For tax purposes, the full value of a death benefit must be included in the taxable estate of an owner who passes away. Effective estate planning addresses whether ownership of life insurance policies should be changed as part of the overall estate plan. Finally, the beneficiaries of life insurance policies are the people who receive the death benefit after the insured life ends. Often the death benefit pays directly into the hands of the designated beneficiaries, tax-free. Sometimes, though, designating a loved one to inherit life insurance proceeds directly in hand can be disastrous. For example, if a surviving spouse receives a death benefit and then enters a nursing home, the entire death benefit can be lost. Similarly, life insurance death benefit proceeds are at risk if left to a beneficiary who is too young to manage it, if left directly to a person with a disability who qualifies for a needs-based benefit, if left to a beneficiary in a marriage headed for divorce, if left to a beneficiary who has judgments or creditors, or if left to a beneficiary who otherwise should not simply receive a large distribution of cash outright. A better alternative might be to leave the proceeds from a life insurance policy to such beneficiaries in trust, so that they can continue to benefit from it, but the risk of losing it is minimized. Sound estate planning includes careful planning with life insurance. Effective funding ensures that ownership and beneficiary designations are properly aligned with the client's goals.
